ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 409/2014 – T

Subject: VAT – right to deduction for SGPS

The arbitrators Dr. Jorge Lopes de Sousa (arbitrator-chairman), Dr. Filipa Barros and Dr. José Poças Falcão (arbitrators-members), designated by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 04-08-2014, hereby agree as follows:

1. Report

"A", SGPS, S.A. (hereinafter briefly referred to as "Claimant"), legal entity number …, registered at the Commercial Registry Office of Lisbon under the same number, with registered office at Avenue …, No. …, in the parish of …, in Lisbon, requested, pursuant to Article 2, paragraph 1, subparagraph a), and Article 10, paragraphs 1 and 2, both of Decree-Law No. 10/2011, of 20 January (RJAT) and Articles 1 and 2 of Regulation No. 112-A/2011, of 22 March, the constitution of an Arbitral Tribunal, seeking a declaration of illegality and annulment of the following VAT assessments relating to the year 2011, interest on late payment and default interest:

The Claimant further requests compensation for damages arising from the provision of undue guarantee, calculated on the basis of the costs incurred with such guarantee, plus interest at the legal rate calculated on such costs and counted from the dates on which they were incurred until the date on which the Claimant is reimbursed thereof.

As a subsidiary measure, the Claimant requests preliminary ruling referral to the CJEU.

Pursuant to Article 6, paragraph 2, subparagraph a), and Article 11, paragraph 1, subparagraph b), both of the RJAT, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators Dr. Jorge Lopes de Sousa, Dr. Filipa Barros and Dr. Marta Gaudêncio, who communicated acceptance of the appointment within the applicable timeframe.

On 18-07-2014, the Parties were notified of such designation, and neither manifested a will to refuse the designation of the arbitrators, in accordance with Article 11, paragraph 1, subparagraphs a) and b) of the RJAT and Articles 6 and 7 of the Deontological Code.

Thus, in accordance with Article 11, paragraph 1, subparagraph c), of the RJAT, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 04-08-2014.

Subsequently, the Deontological Council designated Dr. José Poças Falcão as arbitrator, replacing Dr. Marta Gaudêncio.

The Tax and Customs Authority filed a response in which it raised an exception regarding the unenforceability of assessments Nos. 2013…, 2013…, 2014… and 2014…, in the total amount of € 234,889.39, on the grounds that they had been annulled prior to the submission of the request for arbitral determination, arguing that such annulment should be taken into account for purposes of determining the value of the cause and liability for costs. As to the remainder, the Tax and Customs Authority argues that the request for arbitral determination should be dismissed.

The Claimant filed a written response to the exception, arguing that the debts referred to in the assessments which the Tax and Customs Authority states were annulled were collected through compensation.

In response, the Tax and Customs Authority stated that assessments Nos. 2013… and 2013… were replaced and not annulled and limited the exception invoked to the default interest assessments Nos. 2014… and 2014….

On 16-10-2014, a hearing took place at which witness testimony was produced, and it was agreed that the proceedings would continue with written submissions.

The Parties presented written submissions.

The Arbitral Tribunal was duly constituted and is competent.

The parties have legal personality and capacity, have standing, and are duly represented (Articles 4 and 10, paragraph 2, of the same instrument and Article 1 of Regulation No. 112-A/2011, of 22 March).

The proceedings do not suffer from any nullities.

2. Factual Basis

2.1. Established Facts

The following facts are considered established:

a) The Claimant is a commercial company, with registered office in national territory, engaged in the activity of management of equity interests, corresponding to CAE …, and provides technical administration and management services to the companies in which it holds interests;

b) For VAT purposes, it is classified under the normal system with monthly periodicity, in accordance with Article 41, paragraph 1, subparagraph a) of the VAT Code;

c) The Tax and Customs Authority conducted an external general-scope tax inspection covering the fiscal year 2011, carried out pursuant to Service Order No. OI…, of 30-04-2013;

d) During that inspection, a Tax Inspection Report was prepared, which forms part of the administrative proceedings, whose contents are hereby reproduced, in which the following is stated, among other matters:

III.2. Tax Due - VAT

III.2.1. Undue Deduction of Tax: € 788,157.62

(A) Description of Facts Undertaken by the Inspected Taxable Person

From analysis of the periodic VAT declarations submitted by the taxable person for the tax period covered by the scope of the present inspection, and the accounting records (account "2432 - Deductible VAT") for the same period, it was verified that the taxable person recorded tax amounts for deduction, which had their origin in VAT imposed on acquisitions of fixed assets and other goods and services, in the total amount of € 1,447,464.53, which corresponds entirely to the total tax subject to deduction during the period.

The taxable person contends, in its analysis of the utilization of the resources on which it bore the tax, that these are exclusively allocated to what it considers to be the global activity of the SGPS, which in its view develops a single remunerated economic activity, and therefore the resources used in conducting operations subject to VAT and not exempt therefrom. It accordingly considers that the deductibility of all the tax borne during the period is in conformity with Article 19, paragraph 1, of the VAT Code (CIVA), which provides:

"For the determination of tax due, taxable persons shall deduct, in accordance with the following articles, from the tax charged on taxable operations they carried out (...) the tax due or paid on the acquisition of goods and services (...)."

Observing the origin of the tax values, it appears that the total deducted by the taxable person results from the following taxable operations:

• Acquisition of fixed assets: € 117,855.16;
• Acquisition of other goods and services: € 1,329,609.37;

(...)

(D1) The Activity of "A" SGPS S.A.

In cash terms, the taxable person obtained actual income from the management of the interests, which was reflected, during the period, in the receipt of dividends in the amount of € 261,806,096.

(...)

The activity of management of equity interests is clearly distinguished as that of greatest importance, inasmuch as it appears to be the most preponderant in terms of volume of business, constituting itself as the principal activity, and consequently the remaining activities permitted to SGPS, namely the provision of technical administration and management services to all or some of its subsidiaries, are understood as being of an ancillary character (...).

(...)

for purposes of classification under VAT, the taxable person is classified as what is commonly referred to as a "mixed taxable person," or more precisely, a "partially taxable person," with a principal activity (management of equity interests) which does not constitute an economic activity for VAT purposes and as such does not confer the right to deduct tax borne on its inputs, but which simultaneously conducts operations within the concept of economic activity, such as the provision of services (which confers the right to deduction) and the granting of credit to its subsidiaries (exempt operation).

(...)

In the analysis conducted, it was verified that the taxable person had at its disposal a material and human structure that enabled it to manage not only the equity interests, but also to grant loans and provide technical services to the subsidiaries.

(...)

By establishing "management of equity interests" as the principal activity, and a clear separation of activities conducted according to their nature and importance, it is certain that there are employees dedicated to the non-economic activity for VAT purposes, and that resources allocated exclusively to this activity are subject to the regime of this activity, and consequently are not covered by the VAT deduction regime.

(...)

(O2) Shareholder Costs / Expenses Borne for Benefit of the Principal Activity

(...)

These are the expenses charged with VAT, which the taxable person incurred during the present fiscal year for the undertaking, among others, of operations subsequently identified related to its investments, which were understood as the best in pursuit of the objectives of "A":

• in the defense of its shareholder position in "B" within the scope of the arbitration proceedings opposing it to company "C";

• in the acquisition of the entire financial interest in subsidiary "D";

• in the strengthening of the direct shareholder position in "B" to 10.86%;

• in the strengthening of the shareholder position in "E" to 45.96%, corresponding to 78.10% of voting rights;

• in the conclusion of a purchase and sale agreement aimed at the acquisition of an interest representing 50% of the share capital of "F" S.A., a company … based in southern Brazil.

Through analysis of the sample taken, it was found that the taxable person considered that all of the charges borne would be allocated to the activity subject to VAT, which, as already demonstrated, in "A" constitutes the ancillary activity of provision of services. That is to say, it was verified that the taxable person, in its VAT treatment, did not distinguish between goods and services acquired, those considered for use exclusively in activities undertaken that do not confer the right to deduction of VAT borne, namely in its principal activity.

(...)

The identification of a set of operations consisting of the acquisition of specialized services from third parties results from the fact that, by their nature and purpose, they find justification within a framework of management of the taxable person's patrimony, with the objective of deriving income therefrom (essentially in the form of dividends and interest), which places the activity of management of equity interests outside the field of application of value added tax. In this context, the VAT borne in the principal activity and which was determined to have been deducted during the period, in the total amount of € 597,606.15, is not deductible due to lack of compliance with Article 20 of the VAT Code.

(...)

(O3) The Non-Treatment of Expenses Allocated to the Principal Activity as "General Costs"

(...)

Moreover, from the analysis conducted on the provision of services activity, in which according to the taxable person, the prices charged (whose hourly rates are in the range of € 350/hour to € 370/hour) in the fees charged "are determined (...) to cover all direct and indirect expenses incurred by "A" with the provision of such services" (see Transfer Pricing Report, page 29), it is found that if this taxable activity were treated in an autonomous manner, that is to say, individually, considering that all resources used by the taxable person are intended for and allocated exclusively to it, it clearly shows a deficit, where the income obtained is openly less than the expenses incurred.

In fact, for a declared volume of business of € 2,784,168, the taxable person declares to incur general expenses, and here are included expenses with supplies and services and with personnel, which total the amount of € 19,447,437.

(...)

If, in a hypothetical fiscal year, we consider the application of the allocation key (determined in subsection 05 of this report) of 15.40%, corresponding to the weight (in man-hours) of resources that the taxable person demonstrated to be directly allocated to the provision of services (see Annex No. 5), to the amount of personnel expenses totaling € 13,737,577 (see account "63 - personnel expense"), we determine a direct cost borne of € 2,115,587.

Subtracting this value from the total provision of services, an operating result of € 668,581 is determined, which according to the taxable person covers "all direct and indirect expenses incurred" with the provision of services to the subsidiaries, and here are included services acquired from third parties and charges with the remaining personnel who in an indirect manner provide support to the taxable activity.

It is not evident how a result of € 668,581 can reflect, for example, the expenses with supplies and services which during the fiscal year reached the amount of € 5,403,112, which constitute a substantial part of the basis of the VAT deducted.

(...)

From the analysis conducted, no evidence resulted that the VAT deducted by the taxable person related to services that, in an integral and exclusive manner, presented a direct, immediate and unequivocal nexus with the taxable service provisions rendered upstream, thereby constituting general costs and as such constitutive of the price of the services provided. Now, in accordance with Article 1 of the "VAT Directive," only the amount of VAT that has directly borne the cost of the various constituent elements of the price of an operation subject to tax can be deducted.

(O4) Tax Borne in the Exercise of Mixed Activity

From the set of operations analyzed and which, in the view of the Taxable Person, justify the deduction of VAT in the amount of € 1,447,464.53, it was demonstrated in the previous point that VAT in the amount of € 597,606.15 was improperly deducted, relating to goods/services acquired exclusively for use of the non-economic activity for VAT purposes of management of equity interests.

Thus, it remains for us to determine, for the remainder of services acquired analyzed and for which it was not possible to effect complete allocation to one of the company's activities, and which therefore fall within common expenses to the different company activities, what portion of the tax borne on their acquisition is allocated to the service provision activity and therefore the right to deduction is verified.

Given the foregoing, for the activity considered as mixed, the amount now under analysis is € 225,238.14 and corresponds to the difference between the total VAT deducted in the operations analyzed (€ 1,224,951.08) and the total VAT analyzed in point D2 (€ 999,712.94) in accordance with Annex No. 3.

Given the purpose for which they are intended, common to the various activities, and here are identified expenses with rent, condominium charges, maintenance and cleaning, fixed assets and administrative equipment, it is recommended that the calculation of the deduction of the VAT borne be based on actual allocation, even if on the basis of criteria or allocation keys that allow the deduction of the VAT borne on the acquisition of goods and services, in proportion to their utilization in the taxed activity.

(...)

(O5) The Allocation or Apportionment Key

Given that part of the employees of "A" is allocated to the principal activity of management of equity interests (see conclusions of point D1 above), and consequently not accepting, as stated by the taxable person, that all of the employees identified, directly or indirectly, work exclusively for the purpose of providing technical services to the subsidiaries, it is our conviction that an apportionment of expenses of mixed utilization be made, having as a basis, for example, the utilization of human resources.

If part of these resources is associated with the remunerated activity, it results, based on time spent on the taxed activity, the definition of a man-hours ratio, which is in line with applicable case law.

Thus, being at issue a set of goods and services related to rental of spaces, fixed assets and others, the application of an allocation key based on the time of utilization of these resources, which reflects the reality of the company, namely as to how it proceeds in the quantification of the benefit to be charged to the subsidiaries based on the number of hours, proves to be, in our opinion, an adequate criterion as it reflects the portion in which those resources were allocated to the provision of services subject to VAT.

It follows, therefore, that of the total time spent by employees in carrying out the global activity of "A," only that used in the pursuit of the taxed and non-exempt activity has a direct relationship with the taxed activity.

For purposes of the calculations conducted, the assumptions considered in the present analysis aiming at simplification of the process were:

i. A total of 227 working days/year (August was not considered here as vacation) with a working schedule of 8 hours daily, which totals 1,816 hours/year allocated to each employee of "A" in their global activity;

ii. That the human resources utilized by "A" in its global activity correspond to an effective number of employees identified in Form 10 submitted by the company as having received dependent work income;

III. For purposes of calculating the total number of eligible working hours of employees of "A," it was considered that members of the governing bodies (CA, CF, AG) without executive functions exercised their mandate occasionally or on a non-quantifiable part-time basis;

iv. On the basis of the schedules constituting Annex No. 6, a total of 7,830 hours was allocated to this service provision activity by 11 of the 37 identified employees;

v. That all employees who participated in the provision of services, although some are stationed at the premises of the subsidiary companies, used the resources of "A" equally.

Given the resources utilized by the taxable person in the set of its activities, here translated into man-hours, the portion allocated to the activity subject to VAT and not exempt (provision of technical services), in relation to which the tax borne confers the right to deduction, corresponds to 15.40% of the total resources consumed, in accordance with calculations evidenced in Annex No. 5, which here are summarized in the following table:

[Table details omitted for space]

Given the set of expenses with the acquisition of goods and services, here consisting of the expense with diverse fixed assets, repair and maintenance works, rents, condominium charges and training activities, whose analysis revealed that by their nature and purpose they are directed to a non-exclusive use of a single activity, but rather by the set of its activities, the total determined amount of VAT borne allocated totals € 225,238.14. Whereby, through application of the determined apportionment key, a total of non-deductible tax of € 190,551.47 results, in accordance with the determination made (Annex No. 7), which is summarized in the following table:

[Table details omitted for space]

In summary:

Through application of Circular Memorandum No. …, for the definition of an apportionment key, with a view to determining the proportional part corresponding to the computation of the economic activity taxed in VAT in the total activity of "A," there resulted in the determination of an allocation rate of 15.40% which appears to us as legitimate, given the status of mixed taxable person, and given the weight of the taxable activity in the overall activity. From this results the determination of VAT considered as improperly deducted, in accordance with Article 23 of the CIVA, in the amount of € 190,551.47.

(E) Conclusion

The grounds adduced lead to our conclusion that the taxable person improperly deducted the VAT borne on the acquisition of various services that were not utilized in the activity of provision of technical administration and management services subject to VAT and not exempt therefrom, which is translated in the violation of Article 20, paragraph 1, of the CIVA.

In summary, it is considered demonstrated that:

1. The taxable person in its capacity as an SGPS exercises as its principal activity the management of equity interests, as an indirect form of exercise of economic activity (paragraph 1 of Decree-Law No. 495/88, of 30 December), which assumes a non-economic nature in the VAT perspective (§ 32 of the judgment of the CJEU of 6 September 2012, Portugal Telecom, Case C-496/11 and its references);

2. Secondarily, the taxable person provides remunerated technical administration and management services to the companies in which it holds interests, which is embodied in an economic activity subject to VAT, and also grants loans, for which it receives interest, constituting this the exercise of an exempt economic activity;

3. Now, being at issue the simultaneous exercise, by the same company, of operations outside the field of application of VAT, of operations subject to VAT that confer the right to deduction (art. 20, para. 1, of the CIVA), and others that are subject but exempt (art. 9, para. 27, subparagraph a), of the CIVA), the deduction of VAT borne on the acquisition of goods and services is not complete;

4. The VAT incurred with resources consumed, which the taxable person allocated entirely to the economic activity of provision of technical services, was fully deducted by it, in the amount of € 1,447,464.53;

5. The fact that the taxable person can deduct the VAT borne is not contested here, but given the set of all operations carried out by the taxable person, to determine, from the total tax borne on the acquisition of goods and services, the amount that is deductible;

6. For the exercise of the principal activity, the taxable person equipped itself with a human and material structure consuming resources that find justification only in light of the existing patrimony of "A," translated in financial interests that give it control of three economic groups;

7. In the analysis of resources consumed, a set of operations was identified consisting of the acquisition of specialized services, which was demonstrated to have been carried out in the exclusive interest of the holding, and as such do not present a direct and immediate nexus with the downstream taxable operations, not forming part of the constituent elements of the price of the technical services provided by the taxable person;

8. It follows that the VAT that was imposed on the inputs here at issue and which was determined to have been deducted during the period is not deductible due to lack of compliance with Article 20 of the VAT Code, in the total amount of € 597,606.15 (see point O2);

9. Additionally, a set of charges related to, among others, training, fixed assets, maintenance and conservation works and rental of spaces utilized was identified, in the amount of € 225,238.14, which is considered to be of mixed utilization in carrying out the taxable person's global activity;

10. An apportionment key of 15.40% was determined on the basis of a man-hours ratio taking into account the total hours allocated to the provision of technical services, which corresponds to the proportional part corresponding to the computation of the economic activity taxed in VAT in the total activity of "A." Through application of the said apportionment key, it follows that the portion of tax allocated to resources not utilized in the activity of taxable service provision amounts to € 190,551.47 (see point O3);

Concluding, it thus results from the total VAT borne on the acquisition of goods and services which the taxable person deducted during the fiscal year, and which was subject to analysis, that given the grounds adduced in this report, a correction in the amount of € 788,157.62 (€ 597,606.15 + € 190,551.47) will be made in accordance with Articles 20 and 23 of the CIVA, the regularization of which will be materialized in different tax periods.

e) On 18-12-2013, the Claimant was notified of the Tax Inspection Report and of the corrections made on the basis of it (document No. 4 attached to the request for arbitral determination, whose contents are hereby reproduced);

f) Following the corrections mentioned, the Tax and Customs Authority drew up the following assessments:

g) Assessments Nos. 2013… and 2013… have a voluntary payment deadline of 03-03-2014, and the remainder have a voluntary payment deadline of 31-03-2014 (documents Nos. 1 and 2 attached to the request for arbitral determination, whose contents are hereby reproduced);

h) Default interest assessments Nos. 2014… and 2014… were further issued and annulled on 20-03-2014 (documents Nos. 2_1.4 and 2_2.4, attached to the response);

i) The Claimant accompanies and advises the management of its subsidiaries (testimony of witnesses "G" and "H");

j) In the year 2011, the Claimant had 37 persons in its employ, including 13 members of the governing bodies who exercised their mandate on a part-time or occasional basis, averaging approximately 25 full-time persons in its employ (document No. 5 attached to the request for arbitral determination, whose contents are hereby reproduced and testimony of witnesses "G" and "H");

k) In the year 2011, the Claimant charged its subsidiaries for the following service provisions (documents Nos. 6 and 9 attached to the request for arbitral determination, whose contents are hereby reproduced):

l) In the year 2011, the Claimant assessed VAT on the service provisions rendered in the total amount of € 640,358.64 (document No. 8 attached to the request for arbitral determination);

m) The VAT incurred with resources consumed, which Claimant allocated entirely to the economic activity of provision of technical services, was fully deducted by it, in the amount of € 1,447,464.53 (Tax Inspection Report, page 16);

n) In the year 2001, the Claimant received in the form of interest on financings granted to its subsidiaries the sum of € 1,926,017.00 (Tax Inspection Report, page 23);

o) The acquisitions of equity interests by the Claimant occur rarely and none occurred in the year 2011 (testimony of witness "G");

p) In the year 2011 "A" proceeded to the disposal of shares in "J" and subscription rights in Bank "K," and no resources charged with VAT exclusively allocated to these operations were identified (document No. 22 attached to the request for arbitral determination, whose contents are hereby reproduced);

q) In the year 2011, the resources allocated by the Claimant exclusively to material operations of collection of dividends ("J" and "L") consisted solely of banking commissions, and the amount of VAT incurred on the acquisition of resources exclusively allocated to the collection of dividends is € 43.71, and the "A" did not deduct this amount of tax (document No. 22 attached to the request for arbitral determination, whose contents are hereby reproduced);

r) In the year 2011, the acquisitions by the Claimant of goods and services exclusively allocated to the granting of credit to the subsidiary companies translated solely into banking commissions, in relation to which the Claimant did not deduct VAT (document No. 22 attached to the request for arbitral determination, whose contents are hereby reproduced);

s) In the year 2011, the VAT incurred on the acquisition by the Claimant of resources of mixed use allocable to the disposal of equity interests amounted to € 169.12 (document No. 22 attached to the request for arbitral determination, whose contents are hereby reproduced);

t) In the year 2011, the VAT incurred on the acquisition by the Claimant of resources of mixed use allocable to the collection of dividends totals € 384.33 (document No. 22 attached to the request for arbitral determination, whose contents are hereby reproduced);

u) In the year 2011, the percentage of the number of accounting records relating to the disposal of equity interests in relation to the total number of accounting records is 0.0473% (2 out of 4,224) (document No. 22 attached to the request for arbitral determination, whose contents are hereby reproduced);

v) In the year 2011, the percentage of the number of accounting records relating to the collection of dividends in relation to the total number of accounting records is 0.2841% (12 out of 4,224) (document No. 22 attached to the request for arbitral determination, whose contents are hereby reproduced);

w) The Claimant, on 16-05-2014, provided a bank guarantee in the amount of € 780,998.39 to suspend the fiscal execution No. …, instituted for collection of the additional VAT assessment relating to the year 2011 (document No. 31 attached to the request for arbitral determination, whose contents are hereby reproduced);

x) The Claimant receives dividends once a year and pays its shareholders once a year (testimony of witness "G");

y) The Claimant receives interest two or three times per year (testimony of witness "G");

z) The Claimant only occasionally makes loans to its subsidiaries that do not require risk analysis (testimony of witness "G");

aa) The activity of the Claimant in management of equity interests is minimal and consumes few human resources in it (testimony of witness "G");

bb) The employees and productive resources of "A" are used overwhelmingly in the activity of provision of services to its long-standing subsidiaries, embodied in the daily accompaniment of their activity and management, with the portion of these resources allocated to the component of financing thereof or to the collection of dividends being insignificant and occasional (testimony of witness "G");

cc) In the determination of the remuneration due to "A" for the services provided, two factors intervened by agreement of the parties ("A" and its respective subsidiaries): (a) € 350/hour in the cases of "E" and "I" and € 370/hour in the case of "D") and (b) hours of 11 employees of "A" (document No. 9 attached to the request for arbitral determination, whose contents are hereby reproduced and testimony of witnesses "G" and "H");

dd) The 11 employees referred to are those who come into contact with the subsidiaries (testimony of witnesses "G" and "H");

ee) The activity of the 11 workers referred to could not be carried out in the manner that it is if there were not the collaboration of all the remaining workers of the Claimant (testimony of witnesses "G" and "H");

ff) The employees of "A" and its productive resources in general are utilized in the activity of provision of services to the subsidiaries, embodied in the daily accompaniment of their activity and management, with the portion of these resources allocated to other tasks, namely dividend collection and interest collection tasks, being insignificant or trivial, and occasional (testimony of witnesses "G" and "H");

gg) On 30-05-2014, the Claimant filed the request for arbitral determination that gave rise to the present proceedings.

2.2. Unestablished Facts

It was not established that the Tax and Customs Authority communicated to the Claimant, through sending of notification to the electronic mailbox VIA CTT thereof, the annulment of the default interest assessments Nos. 2014… and 2014….

Although the Tax and Customs Authority states, in Article 11 of its response, that it carried out such notification and invokes "document No. 3," the document which it attached makes no reference to those assessments nor to their annulment, justifying, therefore, that the Claimant responded to the exception raised by the Tax and Customs Authority in the conviction that such annulment had not occurred.

2.3. Rationale for Establishment of Factual Basis

The evidentiary assessments in the Tax Inspection Report and in the documents attached to the request for arbitral determination and also, in the points indicated, in the testimony of witnesses "G" and "H," who demonstrated knowledge of the operation of the Claimant and appeared to testify with impartiality.

There are no facts relevant to the decision that have not been established.

The Tax and Customs Authority argues that it is insufficient for the Claimant to assert that these are general expenses of its activity, and that, in accordance with Article 74 of the General Tax Code, the Claimant must have fulfilled the burden of proof that falls upon it, with neither internal documentation nor witness testimony being relevant in this regard.

It is manifest, however, that there is no limitation as to means of evidence, since the General Code of Tax Procedure (CPPT) applies to tax arbitration proceedings by virtue of Article 29, paragraph 1, subparagraph c) of the RJAT, and in Article 115, paragraph 1, of that Code it is established that "all general means of evidence are admitted."

On the other hand, the entire right to deduction exercised by the Claimant was based on documents, and it is on the basis of them that the Tax and Customs Authority determined the amounts that were deducted.

And, although the Tax and Customs Authority refers to "the invoices issued by the taxable person, downstream, in the scope of the remunerated activity, do not specify in concrete terms the services performed, containing the descriptive generic designation of 'provision of technical administration and management services,' which makes it difficult to establish a correlation with the diversity of charges in relation to which the taxable person understands it is legitimately deducting the tax borne," the fact is that such alleged difficulty did not prevent it from concluding that "we are faced with expenses that respect the company itself and are undertaken in its exclusive interest, and no relationship of utilization can be established between these resources and the taxed activity, which would always be incurred, regardless of whether the Claimant provided any ancillary services to its subsidiaries, not presenting a direct, immediate or unequivocal nexus, or even a reflexive one, with those same taxed activities, and not burdening the price of the operations conducted downstream."

Furthermore, the Tax and Customs Authority neither alleges nor demonstrates any accounting irregularity or refusal to present documents by the Claimant that would prevent the exact determination of its activity relevant for VAT purposes, whereby it is necessary to conclude that any doubt that may exist on any point of the factual matter must be valued procedurally in favor of the Claimant, by virtue of Article 100, paragraph 1, of the CPPT, which establishes that "whenever the evidence produced results in well-founded doubt as to the existence and quantification of the tax fact, the impugned act must be annulled."

3. Exception Raised by the Tax and Customs Authority

The Tax and Customs Authority raised an exception of unenforceability with respect to the VAT assessments Nos. 2013… and 2013… and the default interest assessments Nos. 2014… and 2014…, on the grounds that they had been annulled.

Regarding the first two, the Tax and Customs Authority came to acknowledge that they had not been annulled, restricting the exception to the latter two.

It was confirmed that the said assessments were annulled, but not that the annulment had been communicated to the Claimant before the date on which it filed the request for arbitral determination that gave rise to the present proceedings.

The annulment of the said assessments implies the lack of subject matter of the request for arbitral determination to the extent that its annulment is sought, which constitutes impossibility of the litigation to that extent.

For this reason, the exception of lack of subject matter (which the Tax and Customs Authority improperly qualifies as unenforceability) as to the request for annulment of assessments Nos. 2014… and 2014… is proper.

4. Matter of Law

4.1. Position of the Claimant

The Claimant argues, in summary, the following:

– the right to VAT deduction arises from a relationship of utilization: if resources were utilized in an activity conferring the right to deduction, the VAT will be deductible, irrespective of the relative weight in terms of value generated by that activity compared with the totality of revenues; the nature of the entity will be irrelevant, and account must be taken of the activity and its relationship with the resources charged with VAT;

– the activity of management of equity interests is considered an economic activity "when the interest is accompanied by direct or indirect interference in the management of the companies in which the interest was taken, without prejudice to the rights that the holder of the interest has in its capacity as shareholder or partner";

– given that it has been demonstrated that the activity undertaken by the Claimant is economic by application of the criteria and parameters of uniform interpretation of the VAT Directive laid out by the CJEU, all arguments of the Tax and Customs Authority that are based on the identification of a "non-economic activity" lack support, and its foundation, which is that resources were consumed in a substantial manner by a non-economic activity that would be (but is not) the principal activity of the Claimant, collapses;

– thus, to the inputs (goods and services) acquired by the Claimant for this activity of management of equity interests with intervention in the subsidiary companies and with the conduct of operations taxed in VAT, there must exist the right to deduction;

– the receipt of dividends arises solely from ownership of financial interests and has no associated resource expenditure or has it only in an insignificant and negligible manner;

– the receipt of dividends cannot fall within the scope of VAT, as it does not constitute the consideration for any economic activity and derives from the "mere taking of financial interests in other companies";

– dividends, which result from the holding of interests, are foreign to the system of the right to deduction, from which it follows that they must be excluded from the calculation of the deduction percentage;

– given that obtaining dividends is not related to the activity of the holder of the interest, nor to the consumption of resources by that holder (here the Claimant), the same (dividends) cannot limit the deduction of VAT incurred or influence it in any way, on pain of violation of the principle of neutrality;

– of the income obtained by the Claimant recorded in its accounting, only those resulting from the activity thereof can be considered as volume of business;

– both income derived from the equity method and actual dividends are not relevant for VAT purposes, as dividends are not based on the "shareholder" activity, but rather on the activity of the subsidiary company and a set of factors relating to it;

– the application of a deduction method (actual allocation) that limits that right in a manner similar to that which would result from the application of a pro rata deduction considering dividends as volume of business, in other words, that results in a substantial restriction of the right to deduction (in this case exceeding 50% of the total VAT incurred in the period), unlawfully distorts the VAT neutrality mechanism and contradicts CJEU case law;

– the status of shareholder is not sufficient to justify VAT deduction, but does not prevent or would limit the right to deduction;

– to receive interest on loans to its few and stable subsidiaries (controlled entities), or to undertake the activity of concretizing such loans, the Claimant expends insignificant resources compared with the set of means at its disposal to accompany and advise (remuneratively) daily the activity of said subsidiaries;

– the loans here at issue have an instrumental character and imply an activity of insignificant weight in the resource expenditure made by the Claimant, making it necessary to conclude that they cannot and should not affect the right to VAT deduction;

– in an activity such as that undertaken by the Claimant, general expenses do not have to be related specifically with any individual invoice of the VAT taxable person, but this does not affect their VAT deductibility, it sufficing that there be no reason to doubt that the consumption/acquisitions were intended to serve that activity.

The Claimant further suggests that, in case of doubt, preliminary ruling referral be used to refer the matter to the CJEU.

4.2. Position of the Tax and Customs Authority

The Tax and Customs Authority understands, in summary, the following:

– The Claimant is configured as a holding whose purpose consists of the activity of management of a set of equity interests in other companies, which constitute its assets, from which it derives the fruits (in the form of dividends, interest on loans, etc.) on which it depends, almost exclusively to fulfill the obligations imposed on it and assumed by it;

– as regards the provision of services to the subsidiaries, it is undeniable that it is permitted to SGPS, in certain circumstances, to undertake these activities (in parallel with the activity of management of equity interests), which are, however, merely ancillary to that;

– the Claimant, in the scope of its principal activity, needs to contract third parties to provide it with certain services indispensable to decision-making related to it, and that allow it to achieve the strategic objectives of the group represented by it;

– this is what occurs with expenses for tax advice, legal consultation and strategic consultancy relating to the holding, acquisition and disposal of equity interests in its capacity as shareholder and relating to investment and disinvestment opportunities, business development of the company and other related matters; with the fulfillment of the holding's obligations regarding accounts review and presentation and activity reports; and with expenses of activities inherent to the legal structure of the holding itself that relate to company administration and secretarial and administrative support services and consultancy relating to the benefits of the company's administrators;

– these expenses charged with VAT were necessarily incurred in the exclusive interest of the Claimant for the undertaking of operations related to its investments, as a company managing equity interests, with a view to better ensuring the management of its patrimony, with which it is tasked by virtue of its corporate purpose;

– as regards goods and services of mixed utilization, that is to say, of joint utilization in conducting operations not arising from an economic activity and in the exercise of economic activities (of which are more relevant the charges with the acquisition of administrative equipment and services relating to the payment of rents of spaces used and their respective condominium charges), in the calculation of VAT deductible use must be made of the actual allocation method, on the basis of criteria or allocation keys, that allow the deduction of VAT borne on the acquisition of goods and services, in proportion to their utilization in the taxed activity conferring the right to deduction;

– the tax inspection services defined the said allocation key, having adopted the criterion of the proportion between man-hours, apportioning the costs at issue (goods and services of mixed utilization) on the basis of the actual utilization of these resources, taking into account the time expended on the said activities, concluding that the right to deduction is 15.4%;

– given that the Claimant deducted entirely the VAT borne in the amount of € 1,447,464.53, in accordance with the provisions of Articles 20 and 23 of the VAT Code, a correction in the amount of € 788,157.62 was made, of which € 597,606.15 relates to the acquisition of goods and services allocated exclusively to the principal activity of management of equity interests, and € 190,551.47, relating to improperly deducted tax, through application of the allocation criterion of the 15.4% percentage on the VAT contained in the acquisition of goods and services of mixed utilization;

– the mere acquisition and sale of equity interests does not constitute the exploitation of property with a view to generating revenues with a character of permanence and as such are considered as operations excluded from the concept of economic activity, and therefore the Claimant does not have the right to deduct VAT in the amount of € 428.04;

– with respect to income derived from interest, they are the result of repeated practice of granting of loans by the Claimant, and therefore it is "a financial operation exempt that affects the pro rata of deduction" and not an ancillary financial operation, and the Claimant would be subject to a deduction pro rata of 88%, making the complete deduction (100%) of the tax borne upstream illegal;

– with regard to income arising from the provision of services where use was made of third-party entities, the VAT deducted corresponds to tax borne in the expense with specialized services not having an actual connection with the taxed activity of provision of services, as there are charges inherent to the support, control and protection of the investment and as such in the exclusive interest of the Claimant as an SGPS, and not being, in that measure, deductible; the statutory audit of accounts, design and production of the report was in the exclusive interest of the Claimant and is connected with the shareholder activity of management of equity interests; the same occurs with expenses for tax advice, legal and strategic consultancy relating to the holding, acquisition and disposal of equity interests and still relating to investment and disinvestment opportunities, business development, legal fees or relating to the provision of financial and market information;

– with respect to expenses relating to fees for services rendered under its Remuneration Committee, they are not related to operations of provision of technical administration and management services to the subsidiaries and, consequently, to taxable operations that permit deduction, and it was not possible to demonstrate the direct and immediate relationship of these inputs with its taxed activity;

– as to the costs borne with advice/consultancy rendered within the scope of the arbitration proceedings that opposed "A" to "C" for control of "B," they are related to the activity of acquisition, holding and management of equity interests undertaken by the Claimant, from a business management and activity expansion perspective, respecting the Claimant itself, as shareholder, and not having any direct and immediate nexus with the taxed activity, in the part subject to correction;

– as to the method used to calculate the amount of VAT deductible, the Claimant can never be considered a full taxable person, that is, with the right to deduction of 100% of the VAT borne upstream with the acquisition of goods and services, its right to deduction as to these goods being limited (cfr. Article 173 of the VAT Directive and Article 23 of the VAT Code).

4.3. Legal Regime Applicable to the Right to VAT Deduction

In accordance with Article 2 of Council Directive No. 2006/112/EC, of 28-11-2006, the following are subject to VAT, among others: supplies of goods made for consideration in the territory of a Member State by a taxable person acting as such; intra-Community acquisitions of goods made for consideration in the territory of a Member State; supplies of services made for consideration in the territory of a Member State by a taxable person acting as such; and importations of goods.

Along the same lines, the Value Added Tax Code (CIVA) establishes in its Article 1 that the following are subject to this tax: supplies of goods and supplies of services made in national territory, for consideration, by a taxable person acting as such; importations of goods; and intra-Community operations made in national territory, as defined and regulated in the VAT Regime for Intra-Community Transactions.

Pursuant to Article 9 of the Directive, "a 'taxable person' means any person who carries out, independently, economic activities of any kind, whatever the purpose or results of that activity" and "an 'economic activity' means any activity of production, supply or provision of services, including mining activities, agricultural activities and professional activities. In particular, the exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall be regarded as economic activity."

The CIVA establishes that taxable persons are, among others, "natural or legal persons who, independently and with the character of habituality, undertake activities of production, trade or supply of services, including mining, agricultural and professional activities, and those who, in the same independent manner, undertake a single taxable operation, provided that such operation is connected with the exercise of the referred activities, wherever it may occur, or when, regardless of such connection, such operation meets the requirements of the actual incidence of personal income tax (IRS) or corporate income tax (IRC)."

The right to deduction arises at the moment the tax becomes due (Article 167 of Directive No. 2006/112/EC and Article 22, paragraph 1, of the CIVA), and, as a rule, only tax that has been charged on goods or services acquired, imported, or used by a taxable person for the purpose of conducting taxable operations can be deducted (Articles 168 of Directive No. 2006/112/EC and 20, paragraph 1, of the CIVA).

With regard to goods and services used by a taxable person to conduct both operations conferring the right to deduction and operations not conferring the right to deduction, deduction is only permitted for the portion of the VAT proportional to the amount relating to the first category of operations (Articles 173 of Directive No. 2006/112/EC and 23, paragraphs 1 and 2, of the CIVA).

The deduction pro rata is determined for all operations undertaken by the taxable person and results from a fraction that includes the following amounts:

a) In the numerator, the total amount of annual turnover, exclusive of VAT, relating to operations conferring the right to deduction;

b) In the denominator, the total amount of annual turnover, exclusive of VAT, relating to operations included in the numerator and operations not conferring the right to deduction (Articles 174 of Directive No. 2006/112/EC and 23, paragraph 4, of the CIVA).

The deduction pro rata is determined annually, fixed as a percentage and rounded up to the next whole number (Articles 177 of Directive No. 2006/112/EC and 23, paragraph 4, of the CIVA).

In accordance with Article 1 of Decree-Law No. 495/88, of 30 December, companies managing equity interests (SGPS) have as their sole contractual purpose the management of equity interests in other companies, as an indirect form of exercise of economic activities, with the interest in a company being considered an indirect form of exercise of the economic activity of that company when it does not have an occasional character and reaches at least 10% of the share capital with voting rights of the company in which the interest is held, either alone or through the interests of other companies in which the SGPS is dominant.

However, Article 4, paragraph 1, of the same instrument permits SGPS to provide technical administration and management services to all or some of the companies in which they hold interests.

4.4. Case Law of the CJEU

The first question which is the subject of the present proceedings, framed by the factual basis established, is whether a company managing equity interests that provides services to its subsidiaries and whose employees are principally and almost exclusively allocated to such provision of services can deduct all VAT borne upstream with the acquisition of goods and services, and including that connected with activities such as the holding of equity interests, the receipt of dividends, and interest derived from loans to its subsidiaries, and the services indicated in the factual basis established.

In this context, given that one is faced with a similar situation, it is necessary to take into account the most recent case law of the CJEU, particularly the judgment of 06-09-2012, handed down in Case No. C-496/11.

Although the judgment was issued applying the regime of the Sixth Directive (No. 77/388/CEE, of 17-5-1977), which was repealed by Council Directive No. 2006/112/EC, of 28-11-2006, which entered into force on 1-1-2007, the regime thereof is essentially similar to the preceding one, in what is relevant here, and therefore such case law must be applied to the situation in the record, despite the fact that the facts concerned occurred in 2008.

In fact, as has been consistently understood by case law, it is a corollary of the mandatory preliminary ruling requirement set out in Article 267 of the Treaty on the Functioning of the European Union (which replaced Article 234 of the Treaty of Rome, former Article 177) its binding nature for national courts when they must decide issues connected with Union law.

Specifically, with regard to the VAT deduction regime, this concern for harmonization is manifested in Directive No. 2006/112/EC, in point 39 of the Preamble, which states that "the rules governing deductions should be harmonized, since they affect the amounts actually collected, and the pro rata should be calculated in the same way in all Member States."

In the operative part of that judgment, which constitutes an evolution in CJEU case law, the following is stated:

"Articles 17(2) and (5) of Sixth Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment must be interpreted as meaning that a holding company such as that in the main proceedings, which, in addition to its principal activity of managing the equity interests in the companies of which it holds all or part of the share capital, acquires goods and services which it then invoices to those companies, is entitled to deduct the value added tax paid upstream, provided that the services acquired upstream have a direct and immediate link with the downstream economic transactions entitling to deduction. When such services are used by the holding company to carry out both economic transactions entitling to deduction and economic transactions not entitling to deduction, the deduction is only permitted for the proportion of the value added tax corresponding to the first-mentioned transactions, and the national tax authority is authorized to provide for one of the methods for determining the right to deduction mentioned in Article 17(5) of that directive. When such goods and services are used simultaneously for economic activities and non-economic activities, Article 17(5) of Sixth Directive 77/388 does not apply and the deduction rules and apportionment methods are laid down by the Member States, which, in the exercise of that power, must take account of the purpose and the scheme of Sixth Directive 77/388 and, to that end, provide for a method of calculation which objectively reflects the real allocation of upstream costs to each of those two activities."

In the case at hand, it is undisputed that the Claimant is an SGPS that provides services to the companies in which it holds interests.

From the evidence produced, it appears that this provision of services was, in the year 2011, the principal activity of the Claimant, which was carried out with the support of all its employees, which justifies that, at a minimum, doubt be raised as to whether, despite its legal nature, the Claimant can be characterized, for tax purposes, as having "the principal activity of managing the equity interests in the companies of which it holds all or part of the share capital" and as "a company performing only an ancillary activity." Indeed, the fact that only approximately 0.33% of the Claimant's accounting records in the year 2011 (14 records out of 4,224) relate to the receipt of dividends and operations of granting credit to the subsidiaries confirms that the greater part of the Claimant's activity was translated into the provision of services to its subsidiaries.

It is expressly stated in that CJEU judgment, regarding a holding company which, like the Claimant, provided services to its subsidiaries, that "if it is to be considered that all the services acquired upstream have a direct and immediate link with downstream economic transactions entitling to deduction, the taxable person in question would have the right, under Article 17(2) of Sixth Directive 77/388, to deduct all the value added tax which has borne the acquisition upstream of the services in question in the main proceedings. This right to deduction cannot be limited by the simple fact that the national rules, on account of the corporate purpose of those companies or their general activity, classify the taxable transactions as ancillary to their principal activity."

Thus, immediately, the cited CJEU judgment removed the conceptual obstacle raised by the Tax and Customs Authority regarding the inadmissibility of full VAT deduction borne by an SGPS, given its nature, when dealing with a company of this type that provides services to its subsidiaries.

On the other hand, as stated therein, it is not relevant for dismissing the right to deduction the "simple fact that the national rules, on account of the corporate purpose of those companies or their general activity, classify the taxable transactions as ancillary to their principal activity."

Thus, the Claimant is correct in arguing, in the first instance, that the right to deduction arises from a relationship of utilization: if the resources were utilized by the Claimant in activities conferring the right to deduction, the VAT will be deductible, irrespective of the legal nature of holding company that the Claimant has and of the relative weight in terms of value generated by that activity compared with the totality of revenues.

The said CJEU case law has explicit support in the legislation of the European Union, in Article 168 of the VAT Directive (Directive 2006/112/EC), which establishes that, when goods and services are used for the purposes of the taxable person's taxed operations, the taxable person has the right, in the Member State in which it carries out those operations, to deduct from the amount of tax for which it is accountable the amounts of VAT due or paid in that Member State in relation to goods supplied to it or to be supplied to it and in relation to services supplied to it or to be supplied to it by another taxable person.

National legislation is in line with that norm, in establishing in Article 20 of the CIVA, that tax that has been charged on goods or services acquired, imported, or used by a taxable person for the purpose of conducting the operations indicated there can be deducted, among which are included supplies of goods and supplies of services subject to tax and not exempt.

On the other hand, also in line with the cited CJEU judgment, the interference of the Claimant "in the management of the companies in which it took interests constitutes an economic activity," for purposes of VAT taxation, and the Claimant is authorized to deduct the VAT paid upstream, provided that the services acquired upstream present a direct and immediate link with downstream economic transactions conferring the right to deduction.

Furthermore, as stated in the same judgment, "the right to deduction is also allowed in the taxable person in the absence of a direct and immediate link between a given upstream transaction and one or more downstream transactions entitling to deduction, when the costs of services in question form part of its overheads and are, as such, constituent elements of the price of the goods which it supplies or the services which it provides. These costs have, in fact, a direct and immediate link with the set of the economic activity of the taxable person."

Thus, in light of this CJEU case law, the deduction by the Claimant of all VAT borne with services and goods acquired that have a direct and immediate link with the services provided to its subsidiaries conferring the right to deduction, or which, not having a direct and immediate link with specific services, is VAT borne with costs that form part of the Claimant's general expenses that have a direct and immediate link with the set of its economic activity of provision of services, has legal coverage.

"The deduction regime is intended to relieve the entrepreneur entirely of the VAT burden, whether due or paid, in the context of all his economic activities.

Thus the common system of value added tax ensures absolute neutrality of taxation as regards all economic activities, whatever their purpose or results, provided that such activities are themselves subject to VAT."

It is in light of this that the various situations in which the Tax and Customs Authority understood VAT to not be deductible must be evaluated.

4.5. Expenses that the Tax and Customs Authority Understood to be Exclusively Connected with the Claimant's Non-Economic Activity, Not Subject to VAT

The Claimant in its analysis of the utilization of fixed assets and goods or services acquired on which it bore tax contended that almost all were directly related to the practice of activities subject to VAT and not exempt therefrom, and therefore the total tax borne during the period was deductible. VAT borne only was not deducted with the acquisition of resources exclusively allocated to the receipt of dividends and banking commissions relating to loans to the subsidiaries, as mentioned in subparagraphs q) and r) of the factual basis established.

The Tax and Customs Authority proceeded on the assumption that the principal activity of the Claimant is the management of equity interests, for being the preponderant one in terms of volume of business, with ancillary character the provision of technical administration and management services to its subsidiaries.

With that assumption, the Tax and Customs Authority identified "a set of operations consisting of the acquisition of specialized services from third parties, which by their nature and purpose find justification within a framework of management of the taxable person's patrimony, with the objective of deriving income therefrom (essentially in the form of dividends and interest), which places the activity of management of equity interests outside the field of application of value added tax. In this context, the VAT borne in the principal activity and which was determined to have been deducted during the period, in the total amount of € 597,606.15, is not deductible due to lack of compliance with Article 20 of the VAT Code."

However, the assumption from which the Tax and Customs Authority proceeded, as to the determination of the principal activity of the Claimant, is incorrect, since, as resulted from the evidence produced, the Claimant is not an SGPS dedicated principally to the management of equity interests, but rather a company that principally develops an activity of provision of services to its subsidiaries, with accompaniment and intervention in its management, which is an economic activity.

Given that the provision of services depends on the global functioning of the Claimant, there is a direct and immediate relationship between the general expenses necessary to ensure that global functioning and the economic activity that embodies the provision of services. The undertaking of investments or the acquisition of services constitute prerequisites of the Claimant's activity of intervention and accompaniment of the management of the subsidiaries, being, therefore, expenses related to the principal economic activity of the Claimant.

The expenses connected with the development of the company's business, of which the Tax and Customs Authority speaks, relate to the totality of the Claimant's economic activity, as the development of the business has repercussions on that activity.

The expenses referred to "related to investment and disinvestment opportunities, business development of the company and other related matters" respect the global functioning of the Claimant, are to be considered general expenses, as they would be in any company that did not have the nature of a holding.

And, as stated in the cited CJEU judgment, VAT can be deducted "even in the absence of a direct and immediate link between a given upstream transaction and one or more downstream transactions entitling to deduction, when the costs of services in question form part of its overheads and are, as such, constituent elements of the price of the goods which it supplies or the services which it provides." The criterion for assessing deductibility that results from this case law is not whether or not such costs are costs that a pure holding would have borne, but rather, in this case, whether or not such costs are general costs of the Claimant, since, according to that case law, general costs, by being such, are constituent elements of the price of the services provided.

It is this understanding that is compatible with the basic idea underlying the VAT regime, which is to ensure its neutrality for companies as long as they are not final consumers and use goods or services acquired in their economic activity.

The Claimant's activities that do not constitute economic activity, namely passive management of equity interests, translated into mere holding of equity interests and receipt of dividends, imply a minimal allocation of resources, whereby it is manifest that the correction made by the Tax and Customs Authority, in the amount of € 597,606.15, is at variance with reality.

On the other hand, with respect to the activity that embodies passive management of equity interests and does not constitute economic activity, namely receipt of dividends, no VAT was deducted, as was considered established in subparagraph q) of the factual basis established.

Thus, it must be concluded that the correction made by the Tax and Customs Authority, as to these expenses, was based on the incorrect assumption that the activity of a holding that accompanies the management of the subsidiaries is not an economic activity, for VAT deduction purposes, which constitutes error in the legal premises that affects said correction.

4.6. Expenses Connected with Goods and Services of Mixed Utilization

The Tax and Customs Authority argues that, with respect to goods and services of mixed utilization, that is to say, of joint utilization in conducting operations not arising from an economic activity and in the exercise of economic activities (of which are more relevant the charges with the acquisition of administrative equipment and services relating to the payment of rents of spaces used and their respective condominium charges), in calculating deductible VAT, use must be made of the actual allocation method, on the basis of criteria or allocation keys, that allow the deduction of VAT borne on the acquisition of goods and services, in proportion to their utilization in the taxed activity conferring the right to deduction.

The Tax and Customs Authority adopted the criterion of the proportion between man-hours, apportioning the costs at issue (goods and services of mixed utilization) on the basis of what it understood to be the actual utilization of these resources, taking into account the time expended on the said activities, concluding that the right to deduction is 15.4%.

It must be noted, in the first instance, that, regardless of the appropriateness of the actual allocation method, its application results from the provision of Article 23, paragraph 1, subparagraph a), of the CIVA regarding the right to deduction of VAT borne with goods or services partially allocated to conducting operations not arising from the exercise of an economic activity.

On the other hand, the utilization of that method is not prohibited by Community law, as stated in the Opinion of Prof. Dr. Xavier de Basto, which the Claimant submitted.

This possibility of Member States imposing the adoption of the actual allocation method is recognized in the CJEU judgment of 13-03-2008, handed down in Case No. C-437/06, in which the following is stated:

"The determination of the methods and criteria for apportioning the amounts of value added tax paid upstream between economic and non-economic activities, as referred to in Sixth Directive 77/388, on the harmonization of the laws of the Member States relating to turnover taxes, falls within the discretionary power of the Member States which, in the exercise of that power, must take account of the purpose and the scheme of that directive and, to that end, provide for a method of calculation which objectively reflects the real allocation of upstream costs to each of these two activities. Member States are entitled to apply, as the case may be, either an apportionment key according to the nature of the investment, or an apportionment key according to the nature of the transaction, or any other key that is appropriate, without being obliged to restrict themselves to a single one of these methods."

In determining the apportionment key, the Tax and Customs Authority understood that "part of the employees of "A" is allocated to the principal activity of management of equity interests (...), and consequently not accepting, as stated by the taxable person, that all of the employees identified, directly or indirectly, work exclusively for the purpose of providing technical services to the subsidiaries, it is our conviction that an apportionment of expenses of mixed utilization be made, having as a basis, for example, the utilization of human resources."

"An apportionment key of 15.40% was determined on the basis of a man-hours ratio taking into account the total hours allocated to the provision of technical services, which corresponds to the proportional part corresponding to the computation of the economic activity taxed in VAT in the total activity of "A." Through application of the said apportionment key, it results that the portion of tax allocated to resources not utilized in the activity of taxable service provision amounts to € 190,551.47."

This correction suffers from the same error as to the identification of the principal activity, which, as mentioned, was the provision of services and accompaniment of the management of the subsidiaries, and not passive management of equity interests.

In light of the evidence produced, it is manifest that the apportionment key applied by the Tax and Customs Authority has no relationship with reality, since it was proved that the persons in the employ of the Claimant in 2011 undertook almost all their activity providing services, directly or indirectly, to their subsidiaries, with the amount of expenses connected with goods and services of mixed utilization resources of mixed utilization that could be considered to have connection with the activity of passive management of equity interests being insignificant.

In fact, the Claimant's activity that was not connected with that provision of services to the subsidiaries was minimal, as evidenced by the 14 accounting records that related to it, when compared with the total of 4,224 accounting records of the Claimant's accounting relating to the year 2011.

Furthermore, it was further proved that the number of hours of the Claimant's workers considered to calculate the price of services provided does not correspond to the number of hours of services of employees of the Claimant that were actually provided to the subsidiaries, as those were only those who came into direct contact with the subsidiaries and whose provision was influenced by the services of all the Claimant's workers.

Therefore, it must be concluded that there is no correspondence with reality in the facts on which the determination of the apportionment key of 14.07% was based, which the Tax and Customs Authority used, which constitutes illegality of the correction made and subsequent assessments, due to error in the factual and legal premises, which justifies its annulment (Articles 20, paragraph 1, and 23, paragraphs 1 and 2, of the CIVA and Article 135 of the Administrative Procedure Code).

5. Compensation for Undue Guarantee

The Claimant further formulates a request for compensation for damages arising from the provision of undue guarantee, "calculated on the basis of the costs incurred with the provision thereof, plus interest at the legal rate calculated on such costs and counted from the dates on which they were incurred until the date on which the Claimant is reimbursed thereof."

[... truncated as document continues beyond what was provided ...]